The risk of deflation, perhaps the nastiest risk facing pension schemes, has come significantly closer following the UK’s austerity Budget last week, but it merely underlines the need for a radical response to a crisis in the pensions industry.

The raising of value added tax from 17.5% to 20% will directly depress demand. The prospect of some government departments cutting their expenditure by a quarter will depress general spending power in the British economy – by so much, in those UK cities that are particularly dependent on state employment, that civil unrest is feared by some.

Add to this a wave of belt-tightening across continental Europe, and the danger of deflation, of prices generally falling, looks real.

Pension scheme trustees fear deflation far more than they do its counterpart, inflation.

Schemes’ rules generally require them to raise the benefits they pay their retired members. Typically, they must raise benefits each year by the annual increase of the retail price index, capped at 3% or 5%. This is not great for pension schemes, but they can manage it because of their equity holdings, since company profits and dividends tend to rise with inflation.

In a deflationary environment, however, there is nothing they can do to reduce benefits to pensioners. As a result, their outflows remain at the same level. Their income, however, will fall over time, unless the scheme is completely invested in bonds – since company profits and dividends tend to fall with deflation.

Paradoxically, pension scheme trustees seemed less concerned last week than they might have been. The reason for this lack of anxiety was that their schemes already face far more risk than their sponsors feel they can take. Companies, overwhelmingly, just want shot of their defined-benefit pension schemes and the seemingly open-ended liabilities they entail.

Many US companies with UK subsidiaries that have pension schemes have become desperate to shut them down. In two cases, Reader’s Digest Association and automotive parts company Visteon, this has led to intervention from the UK’s Pensions Regulator.

The Reader’s Digest Association filed in February to put its UK operation into administration following the Pensions Regulator’s rejection of a rescue deal agreed between the company and the trustees of its pension scheme. The Pension Protection fund has since been assessing its eligibility for a state rescue.

The Pension Protection fund and the trustees of the Visteon UK Pension Plan last month abandoned an attempt to sue Visteon’s US parent for $550m, money that the plaintiffs would have put into the pension pot. They said they had abandoned their attempt because the costs and the risk of failure outweighed the potential benefits.

The general situation looks so grave to one senior executive of a UK pension scheme that she quipped, rewriting John Maynard Keyne: “In the short term, we are all dead.”

Another described feelings of acute frustration in trying to find an insurer to buy out part of his pension schemes’ risk. Having demanded reams of information at a microscopic level of detail about the schemes’ members, including income, age, difference in age between members and their spouses, and geographic location, the insurer two weeks ago suddenly upped the quote by 3%. The reason given was uncertainty about Solvency II, the incoming regulation on insurers that would limit their ability to make certain investments and curtail their risk-taking.

No other insurer would give this pension scheme a quote. It has now turned to the investment banks to see if it can negotiate a longevity swap, to take off at least part of its risk – but feels pessimistic. No one wants pension risk, he feels. Everyone is trying to get rid of it.

The time may have come for a radical move.

It is almost unthinkable, and goes against the grain of tradition, honour and fairness, but perhaps the moment has come for schemes to seek a renegotiation with their members, including those already receiving their pensions.

It feels morally repugnant to go to those who, having retired, have few or no real other options for income. Nevertheless, reality is starting to bite. Companies have begun to realise that they cannot afford to keep the promises they made to their employees, now retired; they cannot afford to underwrite the retirement and health benefits they guaranteed.

If companies cannot afford to meet these liabilities, they should seek to renegotiate them. It is a horrid thought. But if the realistic alternative is corporate failure, this would be a better solution for everyone.

The news that Stark Investments, a $4bn (€3.3bn) US hedge fund manager founded in 1986, saw the departure of five of its 15 partners last week brings home just how fragile the business of asset management can be.

The company, which saw its assets under management almost halve over the last 18 months, expects to carry on successfully, according to Mike Roth, a partner at Stark, who said: “We are confident in our ability to take advantage of the current markets and future opportunities, and are committed to serving our investors’ best interests.”

It does not take much for a hedge fund management business to see a significant reduction in its business. As our article on key-man risk shows, the same is true of the mainstream asset management industry. Unfortunately for fund managers, not a lot of politicians know this.